Controlled Group Issue

[Guest PES]

Company A and Company B are are Controlled Group owned 100% each by one individual. The owner wants each company to have its own 401(k) plan. The owner wants to give a match contribution to the employees of Company A, but does not want to give a match contribution to the employees of Company B.

Since the two companies are a controlled group, it is my understanding that the employees of the two companies are considered one employee group for ADP/ACP testing and coverage testing. I am confused about how to handle the coverage testing in this situation. Do I aggregate the two companies together for coverage and see if they pass, or does each plan need to pass coverage by including the employees of the other plan? I am getting hung up on the coverage issues for some reason, and would appreciate any help.

[E as in ERISA]

You perform discrimination testing based on how you passed coverage testing. You probably want each plan to pass coverage on its own, so that you don't have to perform discrimination testing on the plans together.

[pjkoehler]

PES: As a threshhold issue: Analyze whether or not these companies satisfy the "qualified separate line of business" definition under Code Sec. 414®. If they do, then you can ignore the controlled group relationship for testing purposes.

[Guest PES]

One of the employers has fewer than 50 employees, so the QSLOB rules do not apply.

Does the fact that both employers are offering plans allow you to test the two plans separately if it yields better results?

I was concerned that with a controlled group you had to consider the participants of both groups as one participant population for plan purposes. This would mean that the entire group had to pass the ADP/ACP tests and coverage test.

If only one of the employers offered a plan only to their participants, would I then have to test the employees of both companies as one participant group, and have to pass ADP/ACP tests and coverage based upon the combined group?

Sorry to beat a dead horse, but thank you for your insight.

[Guest PES]

I have one more question concerning this issue. A business associate of mine recently attended the AICPA benefits seminar. At this seminar, one of the speakers discussed a similar case that was a controlled group with 2 companies. Each company had a plan, but the match formula was different for each plan.

The speaker at the AICPA seminar indicated that the match contributions must pass 401(a)(4) (general) test in addition to the ACP test. This makes it sound as though you must test both companies as one employee population which must pass 401(a)(4) and the ADP/ACP tests as a whole.

[E as in ERISA]

Coverage testing is performed based on all employees of the employer (with certain exceptions). Then discrimination testing is performed on the plan. But Regs Section 1.401(k)-1(g)(11) indicates that the "plan" includes all plans that are aggregated to pass coverage testing.

So if each plan passes coverage separately (considering all employees in both companies), then each can be tested separately for discrimination.

It may not matter if each has a plan or not. Either way you need to make sure that the plan you're testing covers a ratable number of HCEs and NonHCEs in order for it to pass on its own.

And depending on your facts, it could be either better or worse to aggregate them for testing. (But if they aren't using the same vendor, then you are going to have problems getting combined 401(k) testing, etc.)

[RCK]

I agree with Katherine's comments. But I'd like to extend this a step.

Assuming that the plans can pass coverage either combined or separately, is it possible to flip-flop annually on how you do the coverage testing, and therefore the ADP/ACP testing? That is do the ADP/ACP separately one year, and combined the next year, etc.

RCK

[Blinky the 3-eyed Fish]

RCK, yes, you can test differently from year to year.